Ron Conway on Entrepreneurs Cashing Out with Venture Financing

VentureBeat reports that Ron Conway is upset about Entrepreneurs taking cash bonuses when they raise rounds from VCs. Mr. Conway argues that all of the capital should stay inside the startup and be used to grow the company as quickly as possible, that entrepreneurs and investors should make money together when the company exists and that lesser know VCs are using these bonuses to steal deals away from KP and Sequoia.

Philosophically, I agree with Mr. Conway that capital's efficiency should always be maximized. However, in practice entrepreneur and investor interests do not always line up because most VC business models necessitate that they shoot for large wins and balance risk through out their portfolios. Take 10 big swings and hope to hit a couple out of the park. On the other hand entrepreneurs have all of their risk in one company and might prefer a garaunteed double instead of a risky home run. Thus, I am tempted to suggest that letting entrepreneurs cash-out a couple of million bucks would be a good way for both parties aim for the fences every time.

The problem with this approach is balancing motivation with financial need. There are some entrepreneurs who could stay focused, but a couple million bucks is a life changing event for most and could easily be a major distraction. On the other hand bootstrapping entrepreneurs in financial need would undoubtedly be more focused if they didn't have to worry about their creditors.

I suggest a hybrid solution... let entrepreneurs cash out, but not more than $250K. This is plenty of cash to do at least one of the following:

• Pay for a wedding
• Comfortably start a family
  
• Make a down payment on a modest home in a nice neighborhood
  
• Pay off debts used to self-fund
• Buy a Porsche
  

$250K should be enough to give the entrepreneurs a bit of breathing room and have a bit of fun, without being so much money that it becomes a distraction.